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The ESG Train is Leaving the Station

December 17, 2020

Environmental, Social & Governance (ESG) investing is no longer just a fad. It’s now a serious protocol for corporate management and for institutional investment management.

I’ve been writing for some time that you need to get onboard now before the train leaves the station.

ESG is all about companies focusing more on the environment, how they impact the communities that they operate in or near as well as having independent boards of directors, more disclosures on finances and operations and welcoming suggestions for better shareholder outcomes.

ESG isn’t new. It has been a fringe movement for decades. But what has changed is that institutions and their investment committees are now fully onboard.

Companies (smart companies at least) have seen the ESG demands from shareholders and have recognized that if they want their shares and bonds to be bought and owned by institutional investors, they need to be ESG-compliant.

And with the surge in individual investors entering or reentering the markets this year, ESG demands by this cohort are further driving the ESG movement.

I’ve been writing about ESG in this Digest on numerous occasions, including the editions on Oct. 15, Sept. 10 and June 25 as well as inside my Profitable Investing newsletter with specific focused recommendations.

ESG = More Green

ESG isn’t just about responding to the growing demands of institutional beneficiaries and interested cohorts, however. It’s about more money.

S&P 500 ESG Index Total Return—Source: Bloomberg Finance, L.P.

The S&P 500 ESG Index has gained 16.4% on a year-to-date basis. This has outpaced the general S&P 500’s return of 15.0%. And I see this outperformance as a harbinger of good for investors that get onboard right now.

One of the positive signs of the ESG movements is the growing surge in demand for ESG investments in the ETF space.

FactSet Research Systems (FDS) is a global financial data company, and it continues to follow the ESG investment demand surge. It recently reported that inflows into ESG ETFs in the US so far this year have amounted to $27.4 billion, which they estimate is double the inflow for the same time period in 2019.

In addition, FactSet has identified 31 new ETF launches in 2020, or double the number in 2019. That represents a huge surge in cash flowing to new ETFs.

One of my favorite asset management companies is BlackRock (BLK). Led by Larry Fink, who is a major supporter of ESG investing, the company has been on the forefront of ESG investment leadership both in its active and passive investments, including its ETF offerings.

BlackRock (BLK) Total Return—Source: Bloomberg Finance, L.P.

BlackRock continues to be a major outperformer in the stock market this year with a return of 43.3%. That’s more than double the return of the S&P 500. It remains one of my favorite stocks with a dividend for even more total return into 2021.

BlackRock also has one of my favorite green bond ETFs—The iShares ESG Aware USD Corporate Bond ETF (SUSC).

iShares ESG Aware USD Corporate Bond ETF (SUSC) Total Return—Source: Bloomberg Finance, L.P.

The ESG bond ETF has been a great performer with a return so far this year of 8.9%, outpacing the overall US bond market by a good margin. Yielding 1.8% in a monthly dividend-paying ETF, SUSC is a great buy now, ideally for a tax-free account.

For US stocks, look to Vanguard’s ESG US Stock ETF (ESGV) that focuses on the leaders in the growing movement. The ETF has returned 23.7% so far this year, proving that ESG beats the general market.

Vanguard ESG US Stock ETF (ESGV) Total Return—Source: Bloomberg Finance, L.P.

The Vanguard ESG ETF has great synthetically represented companies that also pay dividends for total return opportunities. Yielding 1.4%, ESGV is another great ESG buy now, ideally for a tax-free account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life